IRS Wins $109 million court case, defeats ‘Project Soy’ maneuver

From the Wall Street Journal – By Richard Rubin –

The Internal Revenue Service won a $109 million victory in federal court this week that will help the tax agency combat aggressive corporate tax maneuvers and collect more money from other companies.

The IRS defeated telecommunications company Liberty Global, which used a maneuver it dubbed “Project Soy” to exploit a gap in the 2017 tax law and was seeking a refund.

“It appears that the only substantial purpose of the transaction was tax evasion,” wrote Judge R. Brooke Jackson of the federal district court in Colorado.

Liberty Global plans to appeal, said Bill Myers, a company spokesman.

“We believe the court has incorrectly decided the case,” he said. “We remain confident in our position.”

Lawyers have been closely watching the Liberty Global case, which they view as a test of the government’s ability to beat large companies and partnerships by attacking transactions as being purely tax-motivated. In recent years, the IRS has become more willing to argue that some corporate transactions lack economic substance, invoking a concept that Congress embedded in tax law in 2010.

“It’s a harbinger of a newly aggressive tactic that the IRS will be using more and more,” said Rob Kovacev, a tax lawyer at Miller & Chevalier who wasn’t involved in the case. “It puts the wind at their backs, and when you combine that with the additional funding that they got for enforcement, that tells you that there are going to be a lot more of those cases and they’ll be pursued more aggressively.”

The case stems from international tax rules created by Congress in 2017 aimed at making it easier for U.S. companies to repatriate foreign profits. Congress subjected accumulated past foreign profits to a one-time tax in the transition to the new system. It then imposed a minimum tax on new foreign profits and created a deduction so foreign profits beyond that minimum tax were effectively tax-free for U.S. companies.

But Congress inadvertently set the effective dates for those tax rules in ways that didn’t line up perfectly. In some cases, this mismatch let companies generate foreign profits that qualified for the new tax deduction but weren’t yet subject to the minimum tax.

Liberty Global, advised by Deloitte, planned the four-step Project Soy maneuver to take advantage of that gap. Project Soy, a series of internal transactions involving a Belgian company, required the signoff of the company’s billionaire chairman, John Malone, according to court filings.

In his ruling this week, Judge Jackson described Project Soy as a scheme to generate artificial earnings and dodge taxes.

Liberty Global urged Judge Jackson to focus on one piece of the transaction with a business purpose beyond lowering the company’s tax bill. Instead, he looked at the entire series of steps, noting that they were choreographed to work together and conducted in a four-day period in December 2018.

And he rejected the idea that Liberty Global had engaged in a basic business transaction exempt from the economic substance rules.

“It is absurd to imagine that Deloitte would be consulted to devise and carry out a ‘basic business transaction’ within any ordinary or comprehensible use of the phrase, and no reasonable factfinder could characterize Project Soy as such,” he wrote.

Deloitte spokeswoman Emily Kiggins declined to comment.

Last year, Judge Jackson rejected a different IRS approach to stopping Project Soy. The government had issued regulations in 2019 to close the gaps in the law. But the judge ruled that the agency didn’t properly follow regulatory procedures.

“Even when those temporary regulations get swatted down, the economic substance doctrine provides the government with a viable second line of defense against efforts by sophisticated taxpayers to exploit statutory gaps,” said Daniel Hemel, a New York University law professor.